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The role of the natural rate of interest in monetary policy

  • Jeffery D. Amato

    (Goldman Sachs International)

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    This paper examines the role of the natural rate of interest in the conduct of monetary policy. The natural rate figures prominently in many theories of the business cycle and of inflation fluctuations, and therefore has the potential to play a key role in monetary policy given the current mandates of many central banks. However, the presence of financial imperfections and measurement uncertainty draw into question whether estimates of the natural rate can be reliable indicators of excess demand pressures. Natural rate-based theories may, nonetheless, provide useful guidance in the formulation of desirable monetary policies.

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    Paper provided by Bank for International Settlements in its series BIS Working Papers with number 171.

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    Length: 24 pages
    Date of creation: Mar 2005
    Date of revision:
    Handle: RePEc:bis:biswps:171
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    1. Katharine S. Neiss and Edward Nelson, 2001. "The Real Interest Rate Gap as an Inflation Indicator," Computing in Economics and Finance 2001 145, Society for Computational Economics.
    2. Michael Woodford, 1999. "Optimal monetary policy inertia," Proceedings, Federal Reserve Bank of San Francisco.
    3. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," Harvard Institute of Economic Research Working Papers 1922, Harvard - Institute of Economic Research.
    4. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "The science of monetary policy: A new Keynesian perspective," Economics Working Papers 356, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 1999.
    5. Marc P. Giannoni & Michael Woodford, 2003. "Optimal Interest-Rate Rules: I. General Theory," Levine's Bibliography 506439000000000384, UCLA Department of Economics.
    6. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, December.
    7. Marc P. Giannoni, 2010. "Optimal Interest-Rate Rules in a Forward-Looking Model, and Inflation Stabilization versus Price-Level Stabilization," NBER Working Papers 15986, National Bureau of Economic Research, Inc.
    8. Andrés, Javier & López-Salido, J David & Nelson, Edward, 2004. "Money and the Natural Rate of Interest: Structural Estimates for the UK, the US and the euro area," CEPR Discussion Papers 4337, C.E.P.R. Discussion Papers.
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